Saturday, July 13, 2024

The gimmick of Sanctions: What if China sells and buys on behalf of Russia?

Image: Courtesy Financial Times

What do the West sanctions to Russia mean?

We have heard of falling Ruble, stocks and financial assets. 

In theory, fall in currency makes imports costlier, exports lesser in revenue. But existing contracts don’t change. And when the new contracts are negotiated, the fluctuation in currency is accounted for by both sides. Inflation’s hurt to domestic consumer goods would be negated by price controls.  Russia could—and would—buy certain strategic stocks, like Japan, to prop up financial markets. Central Bank would step in to stop the free fall of currency. Effects, if any, would happen in long term. 

We have heard of sanctions on individuals, banks, goods and services flow, investment, international payments etc.

So Russia won’t import goods easily or cheaply. Less exports of good could close industries and layoffs. But since there happens to be  a reserve stock of inventories, the effect could take months to happen. But what happens if China buys the stuff on Russia’s behalf and then becomes a via-medium for exports-imports?

What about Russia’s lifeline Oil and Gas: Who no sanctions on this sector?

The world knows oil and gas are the ventilators on which Russia survives. If Russia is to be punished, that ought to be the first measure. It won’t receive foreign currency since 85% of global oil trade is done in dollars. 

But here is the thing. The oil markets would roil if Russia’s 15% input to global supply of crude is cut. Gasoline in US would be $1 a gallon costlier.  Remember, Germany has suspended—not shut down—Nord Stream 2 which is yet to open up! If it is serious it should shut the 50% of its supply which it receives from Russia. This natural gas flow from seven pipelines to SouthEast Europe before it reaches Germany. Russia gas also reaches Berlin through its pipeline from Turkey. Why the US and Europe are not shutting down these pipelines which supply 40% of Europe’s gas? If anything, Russia would earn more revenue now the gas prices would be spiked. And EU industries could collapse. 

Sanctions on Russia’s gas won’t happen anytime soon. Germany doesn’t have the port facilities to accept US’ LNGs the cost of which—conversion and transport included—would be five times higher. Others such as Qatars and Azerbaijans too are years away from expanding production facilities. 

And why are some other key sectors excluded from sanctions?

For instance aluminum exports from Russia. After all, the US auto, Boeing, canning industry depends at least 10 per cent of its supplies from Russia. Europe, if anything, is more dependent on Russia’s aluminum. US can’t resist the corporate lobby, you see. There are some other critical metal-based commodities imported from Russia. 

And why Russia’s biggest banks are exempted from sanctions?

Only some Russian banks are sanctioned, not the biggies. They are central to processing SWIFT payments from the Russian side. And that’s because the big US oil corporations don’t want to suffer in the global markets. Russia could also freeze considerable foreign investors’ assets in Russian banks.

Banking sanctions might not work. Russia’s Central Bank could step in to absorb debt like US’ Federal Reserve does often in emergency. One must not forget that Russia has $680 billion of cash-chest in liquid currency and gold. This is massive reserve. It could also help Russia’s Oligarch investors. 

SWIFT appears to be the silver bullet against Russia. But is it?

This is international payments system. For goods and services. Purchases and sales. Connected through global banks in which US banks are the big daddy. For they have the dollars, the global trading currency. 

Interestingly, it wasn’t part of initial sanctions by West. SWIFT has its base in Belgium and it meant for US to get EU on board. But its’ now been set in motion. But the economic cost would be equally damaging for West due to rising inflation via oil prices. But what happens if Russia uses China’s Yuan currency in its transactions? Or it starts using China’s digital currency which has already been introduced in the Middle Kingdom? We also know that China-Russia have been working behind the scenes for years to set up a parallel International payments system 

Trust the financial markets to know more than we do. The US and EU financial markets fell steeply on the first day of Russia’s military operation—but it bounced back no sooner than when Biden announced initial sanctions. 

Media, convinced that we commoners are dumb, won’t stop its propaganda meanwhile. 

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